Monday, August 31, 2015

FSF Has Employment Opportunities

The Free State Foundation, one of the nation's leading free market "law and economics" think tanks has openings for highly qualified persons for a couple of positions. See the job descriptions here. In both instances, excellent writing skills, and proven experience, are a must.

Friday, August 28, 2015

The Tortoise and the FCC...and the FCC Loses!

Once in a while -- well, more than once in a while! -- the FCC takes an action that makes you wonder. More specifically, that makes you wonder when the FCC will get serious about implementing real agency institutional reform.

Case in point.  The FCC's Wireless Bureau just issued an order approving applications filed by AT&T Mobility and KanOkla Telephone Association to assign AT&T two of KanOkla's 700MHz licenses in two local markets, one in Kansas and another in Oklahoma.

The good news is that the FCC finally approved the assignment of these two local market licenses.

The bad news? The assignment applications were filed on September 4, 2014. So it took the Commission almost a full year to grant the approvals -- even though the applications were not opposed. The FCC order states that the agency "received no filings in response to the Accepted for Filing Public Notice." In another place it reiterates that no petitions to deny or comments were filed regarding the applications.

You can read the FCC's 11-page order and decide for yourself whether it should have taken the FCC a year to act on unopposed applications relating to two local wireless markets in Kansas and Oklahoma.

I've already decided that it just shouldn't take that long.

We all know the story about the tortoise and the hare. The FCC's job is not to make the tortoise look good so often.

Thursday, August 27, 2015

Bill Maher Does Not Understand the Sharing Economy

In a segment during his most recent episode of HBO’s “Real Time with Bill Maher,” Bill Maher stated that the sharing economy is the result of Americans adapting to income inequality in a “greed is good world.” He also called the sharing economy the “desperate economy,” because as a millionaire himself, Bill Maher apparently thinks it is sad that people are so desperate for money that they would share their home or car. He finished the segment by saying: “The one thing we’re not sharing are the profits. Somehow they forgot to make an app for that.”
It is clear from this segment that Bill Maher does not understand how the sharing economy operates. He even called it a “barter economy” at one point.

The sharing economy incentivizes entrepreneurial activity. While “profit sharing” may not be the apt term to describe how the sharing economy makes people better off, workers in the sharing economy are contractors; therefore, they create their own work, display their own skills, and are compensated directly for their own services. Each worker is essentially operating his or her own business. The sharing economy empowers workers and consumers through the use of reputational feedback mechanisms and peer-to-peer transactions, so the profits are being spread among the millions of users every single day. (See this recent Perspectives from FSF Scholars for more on the importance of reputational feedback mechanisms.)
Bill Maher claimed that the sharing economy is increasing income inequality and that workers have no choice but to engage because of a stagnant labor market in the U.S. If this is true, it makes the sharing economy a solution for workers, not the problem Maher claimed it is. He even made the following misguided statement about Airbnb: “Do you really think anyone wants to have total strangers living in their apartment for a week?” Well, clearly some people do want this, considering that Airbnb has had over 1.5 million listings in 190 countries around the world. Maher never explained how he thinks the sharing economy is harming the poor or exacerbating income inequality. But I can tell you he is wrong.
In May 2015 Free State Foundation scholars submitted comments to the Federal Trade Commission regarding the sharing economy. In the comments, we discussed the results of a March 2015 paper entitled “Peer to Peer Rental Markets in the Sharing Economy,” which empirically found that, for a couple reasons, sharing economy markets have an even greater beneficial impact on low-income persons than high-income persons.
As we explain in our FTC comments, the sharing economy raises the standard of living for poor consumers by creating access to goods and services that they would not have otherwise:
Due to the accountability and transparency that many sharing applications provide about their users, the emergence of trust between individuals to share their goods and services has shifted consumer preferences from owning to renting. People who could not afford to own a house, car, or even a power saw can now more easily rent them from others and ultimately enjoy a higher standard of living than they would have otherwise. Additionally, people who would have owned a car or power saw in the past might now rent them instead, saving a significant portion of their income.
Of course, consumers with high-incomes gain from the sharing economy as well. But the savings accumulated from a shift in owning to renting is more valuable to consumers with lower incomes. In economic terms, this is the law of diminishing marginal returns. All else being equal, each dollar earned is valued less than the previous one.
We also explained how the sharing economy creates entrepreneurial opportunities for poor people that would not exist otherwise:
Similarly, low-income consumers who already own goods that can be rented out stand to gain more from these transactions than high-income consumers. The extra income from sharing a car with someone is much more valuable to a poor college student than it is to a wealthy professional. Airbnb, for example, makes traveling less expensive, not only because it provides competition – and often lower prices – to traditional hotels, but also because travelers can share their living space while away. In other words, as a result of the sharing economy, the same traveler on the same trip may realize economic benefits in his or her capacity as both a lessor and lessee.
If Bill Maher were to stop criticizing successful businesses, maybe he would be able to appreciate the real economic benefits that the sharing economy enables, especially the benefits it brings to low-income individuals. But the fact that Bill Maher thinks the sharing economy exacerbates income inequality makes it clear that he has no idea how the sharing economy actually operates – through reputational feedback mechanisms which enable bisymmetrical trust and enhance welfare between consumers and workers.

Tuesday, August 25, 2015

FSF Scholars Announce New Book on the Constitutional Foundations of Intellectual Property

Free State Foundation Senior Fellow Seth Cooper and I are pleased to announce that our new book, The Constitutional Foundations of Intellectual Property: A Natural Rights Perspective, is now available on Amazon. 

We believe that readers, whether academics, students, policymakers, or just ordinary citizens, will find the book not only useful and informative, but interesting as well, with its blend of history, biography, philosophy, and jurisprudence.

Sunday, August 23, 2015

Maryland Needs to Improve Its Regulatory Climate - Part II

Last month, on July 13, I published a blog titled, “Maryland Needs to Improve Its Regulatory Climate.” There I commended Governor Larry Hogan’s recent announcement that he has created a new Regulatory Reform Commission to examine regulations to determine which ones are unnecessarily burdensome. In announcing the panel’s formation, Governor Hogan stated: “For years, over-burdensome and out-of-control regulations were making it impossible for businesses to stay in Maryland.”

As I stated in the earlier piece, even though it appears the new panel may not have any role beyond identifying regulations that should be considered for elimination or modification, “the establishment of the commission is a welcome step in any event for the focus it brings to the need for regulatory reform.”

Here I wish to carry on the discussion of regulatory reform and offer some further suggestions. But first, to put matters in the proper context, I want to repeat what I said in my July 13 blog:

“Not all regulations are bad, of course. Many serve important purposes, most especially those directly related to protecting public health and safety in carefully targeted ways. But all regulations impose costs upon those they affect, be they ordinary citizens or business. And, this is the important point: these regulatory costs – although “off-budget” – have the same economic effect as taxes.

So, just as reducing unnecessary spending is important to improving Maryland’s fiscal health, so too is eliminating unnecessary or unduly burdensome regulations. The positive economic effect that results from leaving more productive resources in the realm of the private sector is the same in both instances.”

The context is important. So please note that I said that many regulations serve important purposes, especially those related closely to protecting public health and safety. But it is also true that leaving in place unnecessary or unduly burdensome regulations has negative economic effects for consumers and for Maryland’s overall economy.

In my July 13 piece, I suggested that Governor Hogan’s new commission might benefit from inclusion of individuals with academic or public policy expertise regarding regulatory policy or regulatory economics. Aside from additional expertise, this might give the panel additional credibility in the face of critiques that it is composed only of business representatives. And I asked whether there should be some central entity within the executive branch to review regulations before they are promulgated to determine that the projected benefits outweigh the costs and they are not inconsistent with other regulations.

Here is a brief sketch of the current process as I understand it.

Proposed State agency regulations are reviewed by the Joint Committee on Administrative, Executive and Legislative Review (AELR) “with regard to the legislative prerogative and procedural due process.” The AELR Committee is comprised of twenty members of the General Assembly, ten appointed by the Senate President and ten by the House Speaker. Moreover, periodic review and evaluation of existing regulations are monitored by the Committee.

 A Maryland statute (§§10-130—10-139, Annotated Code of Maryland) requires that each State agency that has adopted regulations review them every eight years. (There are some exceptions.)  According to the criteria specified in the statute, the purpose of the review is to determine (1) whether the regulations are necessary for the public interest; (2) continue to be supported by statutory authority and judicial opinion; (3) or are appropriate for amendment or repeal.

There is an Executive Order (Executive Order 01.01.2003.20), adopted in 2003, that implements the periodic regulatory review process established by the statute. The Executive Order supplements the above statutory criteria by providing that an agency also should consider whether regulations “under review are effective in accomplishing the intended purpose of the regulations.”

The above description indicates that Maryland does have a form of regulatory review process in place. This is good – as a starting point. But there is room for improving the process. Here are some observations that, my view, warrant further consideration:

  •      Neither the process for considering proposed regulations or for those already adopted is as rigorous as it ought to be in taking into account regulatory costs and benefits. The criteria applied by the AELR Committee at the adoption phase do not come close to amounting to any sort of weighing of costs and benefits or effectiveness test. And the criteria specified by law for the periodic regulatory review do not meet this test either. While a purpose of the review is to determine whether the regulations “are necessary for the public interest,” this standard is too vague to require even a standard weighing of costs and benefits.
  •      The Executive Order does require a determination as to “whether regulations under review are effective in accomplishing their intended purposes.” This requirement gets closer to dictating the performance of a more rigorous analysis than that required by a generalized “public interest” determination. But including some reference to requiring a cost-benefit analysis would strengthen the review. For example, the Executive Order could be revised to provide that an agency “should consider whether regulations under review are effective in accomplishing their intended purposes, taking into account the costs and benefits of such regulation.” And, for regulations that are not intended to protect public health and safety, but rather fall in the category of economic regulation, there should be a requirement to assess marketplace competition to determine whether there is an existing market failure.

  • Not all regulations are equally significant, of course, in their projected impacts on the economy. There should be a process for identifying those major regulations that are projected to have the most significant economic impact on Maryland’s economy, say, over $5 million per year, so they can be subjected to more rigorous scrutiny at the outset than those that will have a less significant impact.

  • The eight-year review cycle is a bit long for periodic review of all regulations, given the pace of technological change and dynamism in many segments of today’s economy. Of course, this is not true of all segments, but there is little doubt that the pace of change is quickening, especially in areas such as telecommunications, high-tech, health care, and energy. It is more common to consider periodic regulatory review cycles in the 4-5 year range. If the review cycle is not shortened across the board, perhaps it should be shortened for agencies with regulations in subject areas known to be susceptible to rapid change or those regulations identified as economically significant.

I am sure there are other ideas worthy of consideration as well, and I hope to explore some of them in the future. For now, my purpose is to stimulate further discussion and thinking.

As I said, Governor Hogan’s formation of the Regulatory Reform Commission is commendable. Unnecessary or overly burdensome regulations adopted or left in place impose a cost on all of Maryland’s citizens. So, it is worthwhile for Governor Hogan, his new commission, and the General Assembly to keep focusing on ways to improve the regulatory process.

Wednesday, August 19, 2015

FCC's "Gatekeeper" Theory Is a Flawed Market Failure Analysis

When analyzing the cost-effectiveness of a regulation, the first questions that should be asked are: Does the regulation address a market failure or systemic problem? If it does, how does it correct the perceived market failure? And do the benefits of the regulatory solution outweigh the costs of imposing new regulatory requirements? The Federal Communication Commission’s (FCC’s) February 2015 Open Internet order failed to properly address these questions.
On August 6, 2015, thirteen economists from prominent universities and policy institutes submitted an amicus brief to the D.C. Circuit Court of Appeals demonstrating that the FCC’s 2015 Open Internet order failed to include a basic cost-benefit analysis. One of the main arguments in the amicus brief is that the FCC employed an inaccurate assessment of market failure. The brief states that “the FCC had no basis for its finding that, absent Title II, Internet Service Providers will utilize ‘gatekeeper’ power to harm consumers and content providers.”
So how does the Commission attempt to justify the Open Internet order? It makes a number of assumptions about ISPs and consumer preferences but it fails to provide any evidence to back up these assumptions. The Commission claims that ISPs are monopolies. It argues that ISPs are “gatekeepers” who control the point of Internet access between content providers and consumers. The Commission says that this relationship encourages ISPs to harm consumers by discriminating against content providers who do not pay for priority.
In reality, ISPs have no incentive to block or throttle content when consumers have a choice between multiple providers. But the Commission creates a false narrative that so-called “switching costs” (or the time and/or money spent in order to switch from one provider to another) are too high, creating monopolistic market power even when multiple providers offer access in a given area. The order claims that “once a consumer chooses a broadband provider, that provider has a monopoly on access to the subscriber.”
The amicus brief responds with the following: “The same ‘monopoly’ could be said to exist for customers who have entered a movie theater or restaurant.” The amicus brief also explains that competition within a local market creates consumer choice and “compels ISPs to offer high quality services at attractive prices to prospective consumers in the hope they become actual customers.” For example, if one provider in an area requires early termination fees for a contract, competitors in the area would likely offer a lower priced service to offset those fees and attract consumers to switch.
The amicus brief gives the following example of how consumers respond to what they perceive is harm: “Time Warner Cable’s losses of broadband subscribers during its dispute with CBS in 2014, even when that dispute was over access to television content, is indicative of how strongly and rapidly consumers respond to changes in content availability.”
The Commission’s “gatekeeper” analysis is completely inconsistent. The Commission claims that the requirements of the Open Internet order, which supposedly prevent ISPs from acting as gatekeepers, are especially important for “rural areas or areas served by only one provider.” But then the Commission claims that areas with multiple providers are also essentially monopolies. The Commission also manipulates its broadband competition analysis by stating that “mobile broadband is not a full substitute for fixed broadband connections.” This despite the fact that 10 percent of Americans have a smartphone but do not have a fixed broadband subscription, according to the Pew Research Center. The fact that 10 percent of Americans made this switch means that the valuation of switching costs and the substitutability of broadband technologies are subjective to the individual consumer and should not be objective determinations by the Commission.
The Open Internet order uses Title II public utility style regulation, which was created for telephone monopolies, so I can see why the Commission – wrongly – attempted to justify its action by claiming that ISPs are monopolies. But because the Internet access market is dynamically competitive among multiple technologies, these regulations create costs which will crowd out innovation and investment. And the burdens of these regulations are likely to harm smaller competitors even more than larger, more-established ones.
So then how does the Open Internet order correct the perceived problems of gatekeepers, high switching costs, and alleged broadband monopolies? It doesn’t. In fact, the Open Internet order creates the exact problems that it is supposed to fix. The order creates an Internet access gatekeeper – the FCC – which must first approve ISPs’ (and likely content providers’) decisions to innovate, interconnect, and invest. It ultimately creates a higher market concentration due to higher regulatory costs pushing out competitors. And the order creates higher switching costs because, as competition decreases, consumers will have fewer choices.
The Commission’s attempt to create a market failure or systemic problem was inconsistent and its analysis was inaccurate. Unfortunately, it seems as if the decision to regulate the most dynamic market in the world came before any assessment of a market failure.